Many land parcels in second-tier cities that failed to sell at auction last year were put back on the market in the first quarter and fetched prices above the reserve price of last year.

HONG KONG (Reuters) - The premiums developers in China pay for land rebounded sharply in the first quarter of 2019 as credit conditions and purchase requirements eased, taking some firms by surprise and prompting caution from others on the pickup in prices.

Many land auctions failed to secure bids or the reserve price in the second half of last year, as developers faced tighter credit conditions and thinning profit margins following a prolonged government campaign to rein in hot property prices and a slowdown in the economy.

But in the first quarter of 2019, the premiums land buyers are willing to pay over reserve prices rose to 19.1 percent on average, according to property researcher CRIC. The 2018 average premium was 9.4 percent - the lowest level in some years.

Second-tier cities have led the 2019 gains, with premiums in eastern Hefei and southwestern Chongqing's at 86 percent and 25 percent, respectively.

Some auctions received hundreds of bids, in another sign that developers are eager to grab land.

"Q1 land prices in some cities have already surpassed the market peak in 2016," said CRIC researcher Xie Yang-chun, citing Chongqing and Zhengzhou, in east-central China, as examples. House prices reached record highs in 2016, prompting the government to introduce tightening measures.

"These cities have large land supply and high inventory risks, developers should be more careful when they acquire land at a high premium there," Xie said.

Many land parcels in second-tier cities that failed to sell at auction last year were put back on the market in the first quarter and fetched prices above the reserve price of last year, CRIC said.

But with official price caps on houses still in place in some cities, the more expensive land costs may not translate into higher home prices just yet, potentially putting more pressure on profit margins.

The rebound comes hand in hand with looser credit conditions this year. China has cut the amount of cash banks must keep in reserve five times since last year to encourage more lending. Banks responded by making it easier for both home buyers to borrow and for developers to secure new funds.

Funds raised by China's real estate developers in the first three months grew 5.9 percent from the same period a year earlier, compared with a 2.1 percent rise in January-February, government data shows.

Another factor behind the land revival is that some land sales removed a requirement that part of the land developers buy must be set aside for rental housing, which could delay returns on investment.

Property investment in China grew 11.8 percent in the January-March quarter compared with a year earlier, the fastest quarterly increase since 2014. The value of land sold during the period however, was 27 percent lower than a year earlier.

New home prices also grew slightly faster in March and property sales by floor area rose at their fastest pace in seven months.

Risks

Still, the rebound doesn't come without dangers, some major developers warn.

Sun Hongbin, chairman of Sunac China, the country's No. 4 developer, is not optimistic this year, he told an earnings conference last month. The company should tread cautiously because asking prices were high, while home sales would not recover significantly, he said.

James Hui, president of Shimao Property, the 11th largest in China, said he preferred to build the company's land bank through mergers and acquisitions, rather than land auctions, because prices were easier to control.

"After the Chinese New Year, the market was very hot, especially the land market, which surprised us," Hui said, referring to the holiday in early February.

"Luckily, we have already worked on a large volume of acquisition deals before the Chinese New Year, otherwise the (buying) prices would be high," he said. "I don't really understand the recent market."

Louis Kuijs, Oxford Economics' head of Asia economics, said the rise in house sales and new builds should be subdued for the rest of the year, though inventories of unsold homes are quite low.

"Thus, if sentiment holds up, it is possible that land sales and housing starts continue to do well even in the absence of any easing of housing restrictions," he said.

Though many homebuilders prefer to acquire land through M&As, deals can take a long time to complete. So some companies have to tap the open market to replenish land banks.

Xiamen-based developer Yuzhou Properties bought land in Hefei last month at a 121 percent premium.

"Chasing 'land king' is not our style," an official of Yuzhou said, referring to the expression used to describe developers willing to pay the highest of prices to secure land. The person declined to be identified in the absence of company authorisation to speak to the media.

Despite the premium, the land would provide a solid return because the price of around 11,000 yuan ($1,633.77) per square meter was much lower than the 20,000 yuan per square meter selling price for homes in the area, she said.

"We're also actively looking at M&As, but M&As require a relatively long time to do due diligence," she said.